Posts Tagged ‘Student loan debt’

The federal government has an income-based repayment plan to help college graduates with student loan debt keep their repayments within manageable limits.

The problem, according to Jonathan Garber of Business Insider, is that some people who use the plan could wind up worse off than they otherwise would be.

Under the plan, borrowers could limit their payments to 10 to 20 percent of their discretionary income, and then have the whole loan forgiven after 20 to 25 years.

Although this sounds good, Garber pointed out that when the repayment is less than required to service the debt, the total debt will increase. Will that matter if the debt is forgiven in the end? Yes, he wrote, because the forgiven debt is taxable income. He gave a hypothetical but reasonable example in which someone with a moderate income could have $19,000 added to his or her tax bill.

Subsidizing borrowers does not solve the real problem, which is colleges charging tuition based on what the traffic will bear. Easing the debt burden increases the amount that the traffic will bear.

The solution, in my opinion, is for community colleges and state universities to provide free or affordable education, as they once did. Private universities would either have to match this or to show they provide extra value.

How do you expect people to start their careers with a hundred thousand dollars in debt, and then save for a down payment, and then save for retirement? This is un-possible even with high paying jobs, which most people don’t have.

It’s true that the magic of compound interest works really well if you start saving at age 21 and continue until retirement, but it’s also true that it’s stupid to save if investment returns are lower than the interest rates on the absurd amount of debt that you were supposed to rack up to enter civilized life.

Really no one should go into this much debt to go to college, but The Kids Today don’t even have the option of cheap public universities like The Kids In My Day did.

Congress passed a law which will lower interest rates on certain student loans for the immediate future. But Alan Collinge, author of The Student Loan Scam and founder of StudentLoanJustice.org, told the Real News Network that interest rates are not the most important problem.

The big problem, he told the Real News Network, is that people who take out student loans do not have the same legal rights as other borrowers—bankruptcy, statutes of limitations, truth-in-lending laws, refinancing rights and abusive collection practices, including predatory fees on defaulted loans. This may have been what he had in mind when he said some lenders find it more profitable to have a loan in default than to be paid up.

The other problem is not the payment plan but the sticker price. The cost of college tuition and fees is rising faster than anything else, even medical costs.

Student loan debt is the one form of U.S. debt that is still going up, and, as Mike Konczal pointed out, student debtors are treated much more harshly than ordinary debtors.

If I am driving around while texting, and I negligently run over and kill a child, or if I am in a gambling institution and I have an 11 and the dealer has an ace, and I mistakenly double down and get a huge gambling debt—those kind of debts—hurting someone, killing someone, gambling debts—are treated less harshly under our bankruptcy code than the debts associated with trying to educate yourself. Student loans are the most repressive debts under the legal structures that we have. These are democratic bills! People voted for them. Hillary Clinton voted for the 2005 bankruptcy bill. Biden voted for it; Biden pushed it. These are things we have chosen, and they are incredibly repressive.

The problem with student loan debt is not just predatory lending, but the interaction of predatory lending, escalating tuition rates and the meme that a college degree is necessary to economic survival. Student loan debt would not be a problem if (1) we had a full employment economy in which a hard-working high school graduate could make a decent living, (2) we once again had public university systems offering a college education at free or low tuition to anyone capable of doing college work, (3) we had community colleges offering job training (which is different from education) at free or low tuition, since employers no longer do so and (4) employers asked for educational credentials only when they were relevant to the job requirements, such as for engineers or nurses. But I don’t see how to bring about any of these things anytime soon.

Speaking in North Carolina yesterday, President Barack Obama had this to say about student loan debt.

For the first eight years of our marriage, [Michelle and I] were paying more in student loans than what we were paying for our mortgage. So we know what this is about.

And we were lucky to land good jobs with a steady income. But we only finished paying off our student loans—check this out, all right, I’m the President of the United States—we only finished paying off our student loans about eight years ago.

That’s really something. I never had to think about student debt when I sent to college in the 1950s. In that era, public universities provided an affordable college education for everybody who was capable of doing college work.

President Obama, and also Governor Mitt Romney, favor extension of a 2007 law which freezes interest rates on subsidized Stafford student loans. If the law is not extended, interest rates will rise from 3.4 percent to 6.8 percent a year, with an added annual debt burden of nearly $1,o00 for the average new college graduate.

This will subtract $6 billion a year from federal revenues. Romney said there needs to be an offset by cutting federal spending, but he didn’t say where. Obama hasn’t said anything about the budget impact.

The real problem, as I see it, is that it doesn’t get at the real problem, which is the high cost of college tuition. So long as college and university administrators are guided by economic incentives alone, making more money available to students will simply result in increases in tuition.

Nor does it address the debt burden of existing college graduates. Note that the College Cost Reduction and Access Act was phased in slowly, so only a minority even of those who graduated after 2007 got the full benefit of the interest rate reduction.

Click on Student Loan Debt Exceeds One Trillion Dollarsfor background from National Public Radio on extension of the College Cost Reduction and Access Act. The charts I’ve found indicate that student loan debt actually is less than $1 trillion, but it is on track to reach that level.

This chart from The Atlantic magazine’s web site shows how student debt has increased just since 1999. The red line is student debt, the blue line is all other individual and family debt. While American families overall have stopped taking on new debt and are even paying down existing debt a little, student debt loan continues to mount.

The New York Federal Reserve Bank estimated American student debt was $90 billion at the start of 1999 and $550 billion by the second quarter of this year, according to Sarah Jaffe on AlterNet; the U.S. Department of Education estimates student debt at $805 billion, and says it will soon reach $1 trillion.

One cause is the high unemployment rate among recent college graduates, which means they let their debts compound instead of paying them off; another is the increase in tuition at public colleges and universities.

President Obama rightly stated in his State of the Union address last year that “nobody should have to go broke because they choose to go to college.” If a college graduate doesn’t get off on the right foot, he or she can be in the equivalent of indentured servitude for the rest of their life.

But the student loan debt bubble affects more people than just the debtors. If you have loan repayments of $400 to $1,000 a month, that’s money you don’t spend or invest in the larger economy. And eventually, unless something changes, the student debt bubble is going to burst, with consequences as catastrophic to the larger economy as the bursting of the home mortgage bubble.

Student loans are different from other kinds of debt. You can’t discharge the debt by going through bankruptcy. The result is that unless you graduate from college and immediately get a job that pays big money, there is a good chance you will spend the rest of your life with a large, compounding debt from which you never can get out from under.

The average college student graduates with a debt of about $27,000, but that can easily mount to $100,000 or more through compound interest, fees and penalties. Lenders can garnish wages, intercept tax refunds and, when the time comes, dock Social Security payments.

In his address last year, President Obama proposed student loan forgiveness after 20 years or, for those who commit to public service, after 10 years. He also proposed a $10,000 tax credit for families who send sons or daughters to four-year colleges. But his recent agreement with House Speaker John Boehner on the debt ceiling will actually make things worse for college students. Under that agreement, interest would start accumulating on student loans while students are still in graduate or professional school. By one estimate, this means they’ll leave school with 16 percent more debt on average.

One thing Congress could do to help would be to allow student loan debtors the benefit of federal bankruptcy law after a certain period—say 10 years. But there is little chance of that. In fact, the bipartisan congressional deficit reduction committee is likely to make things even harder on student loan debtors.

When I went to college in the 1950s, state colleges offered college educations to anybody capable of doing college work at tuition rates anybody could pay. Middle class families could save up to put their children through college without going into debt, and poorer students could work their way through college without going into debt.

I would like to see the state college systems resume their original mission, and get rid of all the chancellors who want to turn colleges into profit centers for their own aggrandizement. But seeing as how financially strapped the state governments are, there is little chance of this, either.

[Added 9/28/11] I was hasty in asserting that other consumer debt is being paid down.

The FDIC in its quarterly report for the 2nd quarter shows that loan portfolios increased by $34.3 billion to commercial and industrial borrowers, auto loans increased by $9.7 billion, and credit card debt increased by $5.2 billion.

… The debt deleveraging story line … did not wish to take into account that consumers were defaulting and banks were writing off debts more than consumers were paying them down.